April 25 (Bloomberg) -- Long Beach, the Long Island shore
town still reeling almost six months after Hurricane Sandy, is
poised to be the first New York city in three years to get
permission to sell debt to fill a spending gap.

New York’s second-wealthiest city by median income is
asking state lawmakers to approve as much as $12 million in
bonds, which would be the biggest deficit financing authorized
since 2007 for a city in the third-most-populous state.

Sandy struck the Northeast Oct. 29, flooding Long Beach and
destroying its signature boardwalk. As the municipality of
34,000 residents about 30 miles (48 kilometers) east of
Manhattan awaits $200 million in federal disaster aid, investors
are still drawn to its bonds, which are rated one step above
junk. Amid the longest rally since 2010 in high-yield munis,
buyers have pushed yields on some obligations to record lows.

“Yields are so low there’s been more and more interest in
high-yield paper,” said Howard Cure, New York-based director of
muni research at Evercore Wealth Management LLC, which oversees
about $4.5 billion. “It has federal aid on the way and Long
Island gets a lot of support from the state.”

Skelos Support

Long Beach is part of Senate Co-Majority Leader Dean
Skelos’s district. Last year, the Republican blocked a request
from the city for deficit financing, which requires lawmakers’
approval, saying if the state could balance its budget without
extra borrowing then Long Beach could, too. At the time, the
city was six months removed from a five-step downgrade by
Moody’s Investors Service. Now, because of the storm damage,
Skelos will back the debt plan, said Scott Reif, a spokesman.

Sandy, the largest Atlantic storm in history, caused about
$60 billion in damages in New Jersey, New York and Connecticut.
It killed more than 100 people in the U.S. and triggered the
worst flooding in the more than 100-year history of the New York
City subway system. Long Beach was among the hardest hit when
the ocean met the bay to its north. The damage to the boardwalk
and beach, its biggest draw, has cut revenue projections by $1.1
million just as city officials were restructuring finances.

Crisis Year

In February 2012, Long Beach declared a fiscal crisis after
an audit revealed city officials had underestimated spending and
revenue for several years, creating a more than $10 million
budget gap. City Manager Jack Schnirman, hired the previous
month to fill the fiscal gap, said the crisis, which allowed him
to reappropriate a $60 million budget, is over.

“The city is certainly in both fiscal and physical
recovery,” Schnirman said. “Investors want to invest in a
positive story.”

Long Beach bonds maturing in July 2015 traded at an average
yield as low as 1 percent this month, data compiled by Bloomberg
show. While that was the lowest since the city issued the debt
in 2005, it was still almost three times the interest rate on
benchmark tax-exempt bonds. The yield spread over top-rated
securities has averaged about 1 percentage point this month,
down from about 1.3 percentage points in the month before the
storm, using BVAL analysis.

The bonds are rated A2 by Moody’s, five steps below the
top, with insurance from Assured Guaranty Corp. Without that
backstop, the securities are graded Baa3, one level above junk.
In December, Moody’s affirmed the grade with a negative outlook,
saying it’ll watch to see if property values rebound.

Company Ahead

Other municipalities will probably join Long Beach in
seeking deficit financing during the legislative session ending
in June, state Comptroller Thomas DiNapoli said in an interview
in Albany.

Rockland County, a suburb north of New York City, is
seeking $80 million to close its gap. In June, Standard & Poor’s
lowered the county to BBB-, one step above speculative grade,
after lawmakers blocked a similar request for deficit bonding
that would have helped close a $40 million imbalance.

DiNapoli said the requests show municipalities are
struggling with revenue that hasn’t recovered from the recession
that ended in 2009 and a 2 percent property tax cap introduced
under Governor Andrew Cuomo.

“We’re going to see more and more localities in severe
fiscal stress,” DiNapoli said. “Places like Long Beach that
had problems before the storm are facing real troubles.”

Suffolk Shortfall

In March 2012, Suffolk County Executive Steve Bellone
declared a fiscal emergency after Suffolk’s spending plan ended
out of balance for the first time in two decades. The home of
Long Island’s Hamptons beach towns was cut one level to A by
Fitch Ratings last month. The county’s budget office projects a
$51 million shortfall in 2013 on lower sales- and property-tax
revenue because of Sandy, Fitch said.

Property values in Long Beach are already recovering,
Schnirman said. The city doesn’t want to participate in a $400
million program Cuomo proposed to buy out beachfront homes that
are in danger of flooding, he said.

Long Beach had median household income of $77,673 from 2006
to 2010, U.S. Census data show. That’s second only to the
$146,069 earned in Rye, a city of almost 16,000 about 30 miles
north of New York City.

“We’re seeing very strong evidence that our residents are
adamant about staying in Long Beach,” Schnirman said. “People
want to stay. It’s their home.”

In the municipal market this week, local debt is extending
a five-week rally as issuers led by Wisconsin offer almost $8
billion of bonds.